Netflix adds 3M subs, beats forecasts, stock craters

Netflix continued the expansion of its streaming business in the first quarter, adding nearly 3 million subscribers to a global base that now includes over 26 million customers.

The company said 1.74 million subscribers were added in the U.S. alone during the first quarter, and it expects to meet its goal of 7 million net subscriber additions by the end of the year.

It also beat analysts’ financial forecasts, increasing revenue by 21 percent to $870 million and losing only 8 cents per share (around $861 million and 27 cents per share had been anticipated).

Still, the company’s stock got hammered in after-hours trading Monday, with its share price dropping more than 16 percent to around $85.45.

The point of concern may not be the fact that Netflix posted its first quarterly loss in seven years. Rather, it might hinge on the company’s disclosure that it expects to end up with lower than expected subscriber gains in the second quarter.

“Q2 net adds will be below those of 2010, despite Q2 gross adds following the traditional seasonal pattern, and despite us expecting to match 2010 in annual net additions,” company CEO Reed Hastings and CFO David Wells wrote in a Monday letter to investors. “We see nothing new or particularly concerning this quarter to date in our member viewing, acquisition and retention. All are healthy.”

Still, with a range of streaming-business competitors on the horizon — TV Everywhere, Amazon and Verizon/Redbox, just to name a few — the Nasdaq could be expressing doubt that Netflix can reach its ambitious year-end goal of 7 million “net adds.”

“The issue is market skepticism that Netflix can reach this level given the June quarter guide. Our belief is that it can,” wrote Citigroup analyst Mark Mahaney.

Speaking to investors in an early Monday evening conference call, Hastings said his company was still in the early stages of rehabilitating its brand following disastrous attempts last year separate its DVD and streaming operations.

“We’re feeling good about the progress we have made, but are conscious of the fact that it’s tender and that we have to be extremely diligent and thoughtful as we build back up our brand reputation,” Hastings said.

With domestic streaming revenue outpacing declines in the DVD rental business, and international expansion into the UK, Ireland, Canada and Latin America already paying off, Netflix officials wrote, they could even turn a profit in the second quarter, instead of incurring an earlier-anticipated loss of $6 million to $8 million for the period.

And there are now plans to encroach beyond further into Europe in the fourth quarter.

For the first quarter, Netflix posted a $103 million loss for its international operations on revenue of $43 million. Foreign revenue was more than triple the $12 million reported in the first quarter in 2011. And foreign subscriber growth, at 1.21 million, represented the company’s best quarterly performance yet by far.

Its more than 3 million subscribers now account for about 12 percent of the company’s bottom line just six quarters after the overseas business was established with an initial incursion into Canada.

Netflix didn’t break out which foreign regions were most responsible for that $103 million net loss. But Hastings conceded that Latin America remains the company’s most challenging region, facing issues ranging from low device penetration to difficulty setting up recurring credit/debit-card transactions.

“The odds of us building a large, profitable business in Latin America are very good, but it will take longer than we initially thought,” Hastings and Wells conceded.

Hastings, meanwhile, renewed complaints levied last week against Comcast for the way the company caps usage through its broadband operations.

“Comcast caps its residential broadband customers at 250 gigabytes per month,” the Netflix executives wrote. “On the Xbox, the Netflix app, the Hulu app, and the HBO GO app, are all subject to this cap. But Comcast has decided that its own Xfinity Xbox app is not subject to this 250 gigabyte cap. This is not neutral in any sense.”

Meanwhile, Netflix also saw its DVD business shrink further, shedding just over 1 million subscribers in the quarter. With just over 10 million disc subscribers left, rental of physical media generated 45.6 percent of Netflix’s revenue in the quarter, down from 52.4 percent in the fourth quarter.

Asked about the performance of Netflix’s first original series, Lillyhammer, Hastings said, “It was quite successful for the amount that we invested. It parallels some of the other premium exclusive content that we’ve got, like a Breaking Bad, in terms of ratio of cost to viewing.”

He added that Netflix is aiming to keep original-production costs at around 5 percent of its overall programming budget.

Netflix spent about $3.9 million billion to acquire movies and TV shows in 2011, but Hastings said the expected rise of that number won’t occur unless there’s a corresponding increase in subscriber revenue.